Friday, 9 November 2018

The shifting of regulatory tides

One of the things that irks me about the Brexit debate and more generally is trade, is trade nerds. There are a number of people who have set themselves up as authorities on trade who serve as a resource for lazy hacks who don't understand the issues, have no interest in looking deeper or acquiring knowledge of their own. They end up churning over the same handful of factoids and telling each other how clever they are.

What we tend to find is that these self-appointed experts have only very narrow perceptions, largely trained to see no further than Brussels. The generalities and cliches are oft recited to much applause from the gallery but there is very little thinking going on.

Probably the least irritating of trade wonks on Twitter is David Henig, who tells us that "Modern trade means complying with regulations. In regulatory terms, EU and US are the superpowers, but the EU more so because US has greater difficulty passing federal regulations. That's an essential but usually overlooked Brexit basic. Fifty per cent of UK trade (approx) is with the EU, plus a few more percent with others tied to the EU. Divergence from EU regulations probably means new barriers to that trade. Barriers which inevitably many businesses will wish to avoid, so will argue against".

All good so far. As a general rule it stands and it is a point I have made on this blog. Wider discussion on this tends to incorporate the somewhat dated Brussels Effect theory which broadly describes how the EU's regulatory regime became predominant.

The debate can also be expanded to examine the difficulties encountered when serving two or more regulatory regimes where each bloc's own protectionist measures and paranoias clash with each other meaning the exporter incurs customs penalties. This much is now generally understood unless you are a Tory Brexiteer, which I suppose is why we all have to keep going over the Janet and John basics.

This, though, all sets the stage for the remainer narrative that the EU is the largest and most powerful regulatory influence and the UK is giving up its place in the driving seat to serve more distant and less lucrative markets. They argue that the UK can stay part of this regulatory ecosystem as part of the EEA thus maintaining access to the single market but typically assert that the UK would be a "rule taker" with "no say in the rules".

This is, of course, something of a crass reduction of the subject which removes all the nuance and deliberately ignores the advantages of being outside of the EU's common commercial policy, ie freedom of association, a free vote and right of initiative in global regulatory forums. These are under-explored benefits because they are inconvenient to the narrative that we would have no say.

Moreover, one could be forgiven for thinking remainers were keen to conceal the shift of the regulatory nucleus from Brussels to Geneva. With every FTA the EU signs it further entrenches the WTO agreement on Technical Barriers to Trade, further formalising the role of global standards bodies.

We also need to look at the emerging global trends. As EU FTAs grow ever more elaborate, the EU adds more of its own conditions to incorporate a number of international conventions on anything from labour law to environmental and climate initiatives.To the average remainer who judges the EU on intent rather than outcome, there is no particular problem with this. The devil, however, is in the detail.

One such example is the increased effort to include references to UPOV91 (International Union for the Protection of New Varieties of Plants) in EU trade agreements impose intellectual property rights on seeds, which can restrict the farmers’ right to save and re-use seeds and undermine local seed systems. This is one of the flashpoints of globalisation whereby EU FTAs are seen by some in Africa as a licence for corporate gouging. There are a number of destabilising and predatory measures in EU FTAs which can be said to contribute to the global migration crisis.

This is where the EU is likely to hit its high watermark. Its system of FTAs are well suited to like-minded developed countries such as Canada, Korea and Japan but with those now in the bag we may see a slowdown in EU trade progress - not least as the political tides are changing globally along with attitudes to what is poorly described as "free trade".

Widening the debate here is Robert McDougall of the Canadian Centre for International Governance who, in reply to David Henig makes a number of important points.

Not the first time I see reference to concept of "regulatory superpower", but not sure I'm convinced. Emphasis is backward. An "economic superpower" can be a “regulatory” one, but converse not likely true. Might be the case in UK-EU context (gravity), but not as general matter.

To the extent the term means capacity to export regulatory standards and environment, this will be a function of leverage, which is either because regulations just make good sense or because they are exchanged for market access (formally in FTA or informally thru market power).

As long as EU retains prosperous (ie attractive) domestic market, it retains this leverage. But as centre of economic gravity shifts from Atlantic to east and south, risk is that relative attraction diminishes, modifying calculation to bear the regulatory costs of market access.

GDPR is perhaps not a good example of “Brussels effect” but of overreach. DPD is better example of former concept because although it also set global standard, differentials were less, which justified compliance costs. With GDPR, the compliance costs are again segmenting markets.

Not necessarily a bad thing to have high local standards that can’t export, but will burden local innovation and keep out foreign innovation, while still allowing big foreign players to comply separately and retain access. This will make it even harder for indigenous innovation.

AI is another example where the “regulatory” is put before “economic”, w/ EU announcing it wants to “lead in thinking about AI” (ie, regulating). Perhaps necessary, but while EU “thinks” about it, US and China are developing it, and then will set standards through market power.

Policy, incl. trade & economic, involves trade-offs between different interests and values; good policy strikes effective balance between them. Setting “high” standards is a good objective, but “regulation” alone is not a sufficient base on which to project “superpower” (end).

Postscript re UK-EU context: since UK was/is a constraint on continental instinct for "regulatory overreach", one concern re Brexit might be that it leads to acceleration of EU overreach in a global economy that is shifting east.

To expand on that, Eurosceptics have long argued that the compliance costs for third countries are a trade deterrent and there is much to suggest this is not an unfair assessment. Controls of foodstuffs present barriers to African producers - more so than tariffs which we are routinely reminded are negligible under the Everything But Arms Agreement.

When it comes to digital and financial services, the costs are likely more and the deterrence factor even greater. There are five basic deterrents; cost, complexity, inadequacy, irrelevance and domestic unpopularity.

Setting up any value chain with the EU comes with considerable upfront costs. This blog has argued that an active aid to trade policy would be to the UK's advantage. That then creates opportunities for UK expert consultancy and financial services even if we are not the direct recipient of the produce. We often find that trade preferences are not utilised simply because the standards cannot be met or are simply not understood.

The irrelevance and domestic unpopularity factors are ones more likely to affect developing countries who may very well think twice about entering any kind of comprehensive agreement with the EU. Noises from UNCTAD are often uncomplimentary about the European Union. Though to the progressive europhile demands to incorporate labour and environmental standards are entirely in keeping with their own values, they are not so well received abroad.

EU FTA conditionality could be described as moral imperialism, deeply intertwined with EU demands on climate measures and equal rights. For developing countries who rely on palm oil and beef exports, the last thing they want is the EU telling them how they can use their own land resources. Deals with China and to a point the USA come with no such strings. Even the UK in its own deliberations, seeking a balance between trade and sovereignty, will struggle to reconcile EU demands to maintain certain environmental and labour laws which eurosceptics have always had in their crosshairs.

As much as Brexit is something of a body blow to the EU, there are other less encouraging metrics seeping out of the EU with many predicting a downturn and without a fundamental rethink of its regulatory demands the EU could very well find itself sliding in relevance.

The essential problem is euro-narcissism where the EU bizarrely sees itself as a bastion of liberal democracy and defender (and exporter) of progressive values. That goes hand in hand with clunky climate initiatives which the USA is turning away from along with Brazil. More will follow. Instead of taking the hint, the EU will likely double down on these such measures to prop up its self image as a conscientious global actor (if you ignore the corpses piling up on the shores of Southern Europe that is).

As Robert McDougall notes, one does not have to be an economic superpower to be influential in regulatory affairs and if that is true for the EU then it is also true for the UK and with our new found agility (while also recovering some of the intellectual capital loaned to the EU) there are ways we can also win the first mover advantage.

Again, though, these shifting tides can only serve as a general model of what is happening in regulatory affairs not least because the EU itself is a "rule taker" and though the EU is a powerful bloc of 27 the size of the European regulatory empire varies according to the sector. Since Canada, Korea, Japan and the EU all subscribe to UNECE vehicles standards, the European sphere is far larger than the EU, and not strictly controlled by the EU.

Though UNECE has already set the standards for conventional automotive rules, autonomous vehicles and associated AI will see China taking a greater role in UNECE, The Brussels effect will become the Geneva effect, and between ISO and Codex we will see a gradual blurring of the lines between the regulatory superpowers. Will the old dynamics still apply?

This is where trade wonks are of limited use in that their fixation tends to lie with the WTO goldfish bowl and the narrow field of FTAs when there are hundreds of international regulatory conventions. eleven different modes of regulatory cooperation and dozens of types of trade deals scarcely related to tariffs at all. Everything from airline routes and inland waterways to banking and customs cooperation.

What we are seeing is an entirely self-serving debate, fiercely policing the scope of trade conversation to maintain ownership of it and to prop up the Brussels narrative. As much as there is a universe beyond Brussels and FTAs the UK ought to be asking if FTAs should be central to its trade policy at all and whether we can afford to waste years negotiating comprehensive deals when we can be making incremental progress in other ways. The question on divergence, therefore, is what are we diverging from and toward what?

In this post I offer no conclusion save to say that the EU is not the only game in town and that exit from the EU by no means leaves us voiceless in European or even global regulatory affairs - and the freedom to build alliances within the many global forums can be used to leverage not only regulatory improvements but also market access. If Britain is to have an active independent trade policy then we urgently need to escape the narrow confines of the debate as it stands. Rather a lot depends on it.